Is House Flipping the Right Investment For You?
House flipping involves buying a house in need of repair, making the fixes, and selling it quickly for a profit. It’s a fairly simple idea, but the execution is anything but simple. Flipping a house isn’t an investment that most investors should take on. That said, for the right investor, house flipping can be extremely profitable.
So, should you invest in house flipping? Let’s find out.
The Short Version
- House flipping can be lucrative for investors with capital upfront and who are willing to DIY the project.
- You can make a substantial profit on just one flipped house, assuming you aren’t met with any complications.
- House flipping is risky, and investors need to be prepared to have extra cash saved in an emergency fund.
The Cost of an Average Flip
Nearly every expert I talked with mentioned the immense cost of flipping a house. The average cost, hovering around $48,000, makes this investment option unreachable for beginners. Be expected to pay the following costs during the process:
The purchase price is likely the largest cost you’ll need to pay. Financing a house you intend to flip increases your risk, so you’ll want to pay the entire sales price if possible. If you have to finance it, consider living in the home while you renovate.
While flippers are intended to be cheap homes you renovate, you’ll need to come up with thousands of dollars, if not hundreds of thousands of dollars to cover just the purchase price cost. “House flippers could benefit from applying the 70% rule. It entails that investors should not pay more than 70% of a property's ARV, minus the costs of the renovations required,” says Jon Sanborn of Brotherly Love Real Estate.
When you purchase a flipper, you’ll need to pay closing costs twice: when you buy and when you sell. On average, closing costs tend to “range between 2% to 7% of the purchase price,” says Sanborn.
Being a real estate agent yourself will help reduce these costs as you'll get a commission when you buy (as the agent for the buyer) and you'll only have to pay one real estate when you sell.
The biggest cost you’ll have will be the materials and time you need to actually renovate the home.
“Naturally, investors calculate the major costs of big-ticket items like kitchen and bathrooms, roof, painting, and floors, etc., says Scott Harvell, Founder of Quick Sale Homes, Inc. “But some investors don’t budget for many of the smaller ticket items that stack up. Light fixtures, switches and outlets, door handles, landscaping, and even as minuscule as nails and screws can all add up to thousands of dollars.”
>>Related: How Much Does it Cost to Sell a Home
While you’re renovating, you need to consider the cost of running the electricity, water, and heat. Just like any other homeowner, you’ll pay these on a monthly basis until you unload the property.
When you’re looking for a house or you’re looking to sell a newly flipped home, you’ll need to account for the cost of the marketing you’ll need to do.
Harvell says “Most investors must consistently advertise in order to have enough opportunities to purchase properties at a discount. The average cost per contract in our market is currently $7,500. In other words…every $7,500 we spend in advertising results in one house under contract, on average.”
Pros & Cons of House Flipping
- It’s a short-term investment – Most flips happen within a year, making them short-term investments that often have high returns. This means you won’t have to wait a decade to reap the rewards of your investment.
- Experienced builders can do DIY projects – Flipping is best done by those who know what they’re doing either on the construction side or the real estate side. This reduces what you’ll have to pay an outsider to do the job.
- Potentially high profits – Flippers earn an average of $67,000 in returns (as of the first quarter of 2022) when they sell. If everything goes as planned, you could earn a serious return in a very short time frame.
- The housing market is often risky – The housing market isn’t known for staying consistent. Certain years see a huge uptick in home buying while others see high interest rates and fewer buyers. For the uninitiated, understanding the complexities that cause these shifts can be difficult and you may not end up buying or completing your project at the right time to buy or sell.
- You’ll pay a lot upfront – Between the purchase price, closing costs, and all of the other associated costs, you’re looking at a huge chunk of money just to get started investing. Many investments don’t have minimum investment requirements even close to that high.
- You may pay short-term capital gains – If you buy, renovate, and sell your home within a year, you’ll end up paying a short-term capital gains tax.
- Financing can be difficult to secure – You can’t go out and get a traditional mortgage when you’re flipping a home. Instead, you’ll need some sort of renovation loan (there are many). These are risky loans for lenders “so they often require collateral like homes or cars before granting approval for funding which adds extra time (and expense) onto any project plan,” says Shaun Martin, CEO of Cash For Houses.
How Long Does it Take to Flip a House?
According to Rocket Mortgage, a typical flip where no issues arise takes anywhere between 6 – 12 months. That said, investors shouldn’t underestimate how many ways this particular investment can go wrong. You’re buying a home, not a stock reliant on a host of factors that shifts the price. You could find you need to redo an entire electric system you didn’t account for, or the whole foundation could be shot, or you may need to repair a well or plumbing.
You never fully know what the house has in store until you have the keys in hand and you start tearing things down. That said, adding a few extra months to your time frame is a necessity when flipping homes.
>>Related: Long-Term vs Short-Term Capital Gains Tax
Who Can Make Money Flipping Houses?
There’s no legal restriction on who can buy homes and flip them. Any adult with the know-how and available cash can attempt to flip a home. That said, there are definitely investors and individuals that are more well-suited for the job.
It pays to have patience when you’re a house flipper. Over-eager buyers likely won’t end up getting the best deal. “Investors that make the most house flipping are highly selective and risk-averse. Don’t jump on the first home that crosses your path; the best investors might run the numbers on a hundred deals before they find one that seems like it might fit the bill,” explains Josh Steppling, a Broker Associate at Josh Steppling Group at EXP Realty.
>>Read more: What Is Due Diligence in Real Estate? (Best Practices)
Those who have successfully worked in construction are some of the best candidates for house flipping. They, after all, know the ins and outs of building and finishing homes. They know how long certain jobs take and likely how much they’re going to cost.
Paying for contractors to come in and do the work for you is too expensive of a route for most investors to take, at least until they have the capital built up to do so. First-time flippers and those without an abundance of capital need to keep the job in-house if they want to make any sort of profit.
Professionals in the Real Estate Industry
Chip and Joanna Gaines have built a real estate empire because they take care of every aspect of flipping a home. Not only do they flip the houses themselves, but they even have a real estate agency now. If you can DIY the entire project and have someone who knows both the construction and the real estate agent components, you’re not having to outsource any work so you’re not shelling out extra cash.
Tips for Flipping a House Successfully
If you’ve decided that flipping homes may be the right path for you, consider a couple of tips before you dive in headfirst:
Wait for the right house. Be patient. The real estate market is apt to change frequently. There’s no use rushing to buy a home if you’re not 100% sure it’ll work out in the end. If you do rush into buying and run into issues, you could be looking at zero profit.
Pay attention to the neighborhood. Flipping a house in a rundown neighborhood that’s not in its revitalization stage could mean you won’t find a buyer with enough money to buy the property. That could lead to a major hit in your profits. Make sure to carefully research the neighborhoods of any homes you’re interested in.
Get an inspection. Getting a second opinion isn’t a bad thing. An inspection is a couple of hundred dollars that could save you from purchasing a house you’ll have to put hundreds of thousands of dollars into.
Have an emergency fund. You never know what’s going to happen when you’re renovating a home, so make sure you have cash on hand. Steppling says his clients “have a “Surprise” line item in [their] budget that accounts for 10%-20% of the total renovation budget. If something unforeseen arises, it won’t stress you out; if everything works out as planned, you get an extra 10%-20% profit.”
Consider living in the house while you renovate. If it's feasible living in the house while you renovate can save you a lot of money. Not only does it remove some of your living expenses giving you more cash on hand it also could save you a ton in taxes. If the home is your primary residence for at least two years you don't have to pay capital gains taxes on any price appreciation when you sell. That's tax-free income!
Flipping houses takes a lot of capital upfront and to cover the ongoing costs. You'll need to purchase the house and then pay to have it renovated. You'll also have holding costs such as loan payments and utility bills that add to the cost each month you own the property.
Living in the property for at least two years while you renovate can help alleviate ongoing costs and can save you money on taxes when you sell.